Participants & Ecosystem

Banking as a Service

What Is Banking as a Service (BaaS)? Definition and How It Works

Definition

Banking as a Service (BaaS) is a model in which a licenced bank or e-money institution provides regulated financial infrastructure, payment accounts, card issuance, payment processing, and lending capabilities, to third-party businesses via API, enabling those businesses to embed financial products into their own platforms without holding a banking or e-money licence themselves.

How it works

BaaS operates through a layered architecture. At the foundation is a licenced financial institution, a bank or EMI, holding the regulatory permissions for financial services: deposit-taking, card issuing, payment initiation, credit provision. This institution exposes its capabilities through APIs to business customers (distributors), who integrate them into their own branded products.

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From the end user's perspective, the financial product belongs to the distributor's brand. The BaaS provider is typically invisible or disclosed only in regulatory small print.

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BaaS capabilities commonly offered via API: account issuance (creating payment accounts or IBANs); card programme management (issuing virtual or physical Visa/Mastercard debit or prepaid cards); payment initiation (domestic and international transfers); direct debit collection; KYC and onboarding services; and balance and transaction reporting.

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The distributor is not the regulated entity, the BaaS provider holds the licence and primary regulatory obligations. However, distributors must comply with conduct of business and AML obligations passed through from the BaaS institution.

Why it matters

BaaS is the supply-side infrastructure making embedded finance possible at scale. Without BaaS, every non-bank wanting to offer financial products would need to obtain a banking or e-money licence, a 12–24 month process requiring significant capital. BaaS collapses that barrier to months or weeks.

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BaaS has faced regulatory scrutiny, particularly in the US, where OCC, FDIC, and Federal Reserve have increased oversight of bank-fintech partnerships following compliance breakdowns at several BaaS providers. Expectations around third-party risk management and AML programme quality have tightened materially since 2023.

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For fintechs and software companies, BaaS enables offering financial products, expense cards, instant wage access, working capital financing, without building regulated infrastructure independently.

With PXP

PXP supports merchants and partners across the payments value chain. To talk through embedded banking and payments as part of your payment strategy, get in touch with our team.

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Frequently asked questions

What is the difference between BaaS and embedded finance?

BaaS is the infrastructure model: a licenced bank or EMI providing regulated capabilities via API. Embedded finance is the resulting product experience: financial services embedded into non-financial platforms. BaaS is how embedded finance is built; embedded finance is what users experience.

Who are the main BaaS providers?

BaaS providers include specialist API-first institutions (Banking Circle, Griffin, Railsr in the UK; Synctera, Treasury Prime, Column in the US; Swan, Treezor in France) and large banks offering API-based infrastructure access. The market has consolidated following regulatory scrutiny, with several early providers exiting due to compliance issues.

What regulatory risks does BaaS introduce?

BaaS creates third-party risk for the licenced institution: if the distributor has inadequate AML controls, the bank bears regulatory exposure. US regulators have issued enforcement actions against banks with weak BaaS partner AML programmes. For distributors, the risk is operational dependency on a single regulated institution, if the provider's licence is suspended, the distributor's product can be disrupted.